It’s that time again. With Election Day right around the corner, investors are bracing themselves for what has historically been a turbulent time for the stock market. While political tensions run high, it’s the stock market’s behaviour that captures the attention of traders and investors, who find themselves caught in the currents of uncertainty and speculation. The weeks leading up to and immediately following an election can have marked effects on the markets, and a look back at history gives us insights into what might be ahead.
Dating back over a century, stock returns around Election Day show distinct patterns. Analysis of the S&P 500 from 1920 reveals that the market tends to perform well leading up to Election Day, with 83% of election years delivering positive returns before the big day. However, the period after Election Day tells a different story, with just 67% of election years seeing positive returns. It’s a divide that speaks volumes about the market’s anticipation versus its reaction to the outcome. Median returns reflect this split, with a 4.7% gain pre-election and a slightly softer 3.7% post-election.
Historically, seasoned investors have taken advantage of this trend by “buying the dips.” This strategy involves purchasing stocks when they experience temporary declines, allowing traders to capitalise on a market rebound, especially in the weeks leading up to Election Day. For those following this pattern, it’s been a profitable ride this year. Alerts for premium members have brought in over 1,200 points in gains since early August. However, while the pattern is clear, the results aren’t always guaranteed, and Election Day itself can bring surprises that could disrupt even the most established trends.
Interestingly, election years as a whole tend to outperform non-election years in the lead-up to the vote. In the six months prior to an election, stocks have historically risen an average of 4.2% more than they do in non-election years, a rally that reflects the market’s optimism—or its faith in change. But as the dust settles and the new administration takes shape, the six months following Election Day often look different, with returns performing 1.4% worse on average than during non-election years.
Political influence on the markets, though, isn’t limited to which party ends up winning. Economic conditions play a significant role in election outcomes and, by extension, the stock market’s response. Over the past 60 years, incumbents have won during recession years only once—back in 1948. For incumbents, a recession is a tough hurdle, and it can heavily influence voter sentiment. If the country is in or entering a recession, it’s bad news for the Democrats, currently in office. And while past performance doesn’t dictate future outcomes, history shows that when an incumbent party loses, the market often sees increased volatility before and after the election.
This year, the S&P 500’s performance has been notably strong, surging 40% over the past 12 months, one of the best rallies in recent history. This strength might hint at the market pricing in a Republican win, although such assumptions are speculative and heavily debated. This pre-election rally could be indicative of market sentiment shifting towards expectations of policy changes that a new administration might bring, particularly around taxes and regulation. It’s an interesting set-up, given the economic complexities the next president will face.
Volatility, too, has been making waves this year. The Volatility Index, known as $VIX, has been elevated all year and is up 65% year-to-date. This uptick reflects market anxiety despite the S&P 500’s record highs. The heightened volatility is a double-edged sword: for the more daring traders, it represents an opportunity to take advantage of sharp price swings. But it also signals underlying unease, as investors navigate the mixed signals of a thriving stock market against the backdrop of a shaky economy.
Gold has been another player to watch. Often seen as a safe haven during times of uncertainty, gold’s price has been climbing steadily this year, experiencing its strongest rally since 1979. While many election years have historically seen lower gold prices, the surge this year is hard to ignore and may be a warning sign. Premium members have capitalised on this trend by following alerts on gold’s bullish set-up when it dipped to $2,600. Since then, it has shot past $2,800, marking another significant gain. For cautious investors, gold’s rally could be a signal that uncertainty is brewing, with some seeking refuge in the precious metal as the election draws near.
Regardless of which party wins, it’s worth noting that election years are typically positive for the market. Since 1928, the S&P 500 has averaged an 11.3% return in election years, with positive performance in 19 out of the 23 years analysed. Only 2008 and 2000 stand out as exceptions, both having delivered negative returns due to external factors—the 2008 Financial Crisis and the 2000 Dot-com Bubble. As we look to 2024, there’s optimism that the markets may fare well once more, though whether this election cycle will deliver another exception remains to be seen.
Looking at recent history, the S&P 500’s performance across the last 24 election years paints a picture of resilience. Despite occasional setbacks, election years have generally rewarded investors. This year, however, the market faces a unique blend of challenges: interest rate hikes, inflation, and global tensions that could impact the economic outlook. The results of this election may well influence these variables, but regardless of the outcome, the stock market is expected to see elevated volatility in the days following Election Day.
For traders, that volatility presents both risks and rewards. The key is navigating the twists and turns without getting caught up in emotional reactions to election results or policy changes. Market reactions to political events often appear sharp and immediate, but seasoned traders know that the bigger picture can reveal opportunities amid the fluctuations. Whether it’s through buying dips in the S&P 500, monitoring gold prices, or following volatility trends, there are ways to make the most of what’s expected to be an active trading period.
Whoever takes office this time around will inherit a robust, yet delicate, economic landscape. The next president will face challenges that extend beyond the stock market, such as high inflation, a potentially cooling job market, and international economic pressures. With the potential for policy shifts in trade, taxation, and regulation, the market will be keeping a close eye on what lies ahead. The president may have to walk a fine line between economic growth and fiscal responsibility, balancing the need for stimulus with cautionary measures that prevent overheating an already complex economy.
The next few months are set to be a whirlwind. For some, it’s a chance to navigate the ups and downs for profit, while others will take a step back, waiting for stability to return. Either way, Election Day 2024 will bring more than just political change. It will mark the start of a new chapter for investors who’ve been riding the waves, waiting to see how this season will play out in the markets. As the dust settles and the direction becomes clearer, one thing’s for certain—election week trading will be anything but dull.
